Morgan Stanley: Any Way You Slice It, Disinflation Is The Bigger Issue Than Inflation

Morgan Stanley shows how U.S. inflation has fallen no matter who you look at the data. They expect core inflation to continue falling, to about 1%. At some point it will start rising again, but we're not quite there yet.

Morgan Stanley's Richard Berner:

Will the real core inflation measure please stand up? Core inflation has declined over the past year. Depending on the metric, however, the deceleration in rents has accounted for most - or more than all - of the decline. Differences in inflation measures have triggered a debate about how to measure core inflation that has obscured the real controversy about the inflation outlook. In our view, the factors influencing this outlook are what really matters.

Two lessons from the measurement debate: First, investors should look to a variety of core inflation measures to judge short-term inflation trends, rather than relying exclusively on any one gauge. While the Fed must pick one metric to communicate its forecast and implied inflation target, officials are well aware of the pitfalls of measurement. Second, sharp data revisions have in the past affected the Fed's preferred price index, the personal consumption price index. These revisions can significantly affect perceptions about inflation risks, so it is important to assess the variation in the PCEPI in comparison with other measures.